Is trading on the stock market a great way to make money or a stupid way to lose all your savings? Not easy questions to answer. But is it really such a gamble? If not, where do you begin? Do you put your savings in an ISA or invest it on the stock market?
Trading is the buying and selling of securities in the hope that you choose wisely and end up richer. So what can you invest in?
Stocks and Shares are more or less terms for the same thing and are used interchangeably to refer to pieces of paper that represent ownership in a company.
Stock is used to describe the ownership of publicly traded companies. So when a business needs to raise cash, rather than borrowing they may sell ownership in the form of shares. Share refers to the ownership certificates of the company.
In a nutshell stock is the capital raised through selling and distributing shares. The company may sell all or just part of the company giving each person that holds a share of stocks, part ownership. These people are called the "Shareholders".
Common or Ordinary Shares in a company entitle the owner to a percentage of any profits the company may make. These shares usually have voting rights so the more you own the larger your slice of profit and the bigger say you have in the way the company is run. Small shareholders, in reality, have no influence as the institutions that hold large amounts of shares will have enough to control the voting.
Preferred Stocks are slightly different to common stocks, these generally give the holder enhanced dividend rights and a higher priority status in the event of the company going bankrupt. If both types of stock exist, common stock holders cannot be paid until all preferred stock holders are paid. Preferred stocks are traded in exactly the same way as common stocks although they will have different values that reflect their related benefits and need to be researched individually.
Penny Stocks the name is a misnomer because there is no generally accepted definition and many traders have their own definitions. Typically it is stock that trades at a low price and usually ‘Over the Counter’ through the OTCBB and pink sheets. These types of stocks are generally considered to be highly speculative and high risk because they are often small unknown companies or newer start ups with a higher risk of failing, so your investment may be less secure and possibly difficult to sell on.
Briefly - A share is a limited number of equal portions in the capital of a company, entitling the owner to a proportion of the profits known as dividends and to a portion of the value of the company in case of insolvency. Shares can be voting or non-voting and whether this right exists often affects the value of the share.
Other options for investment.
Guaranteed Equity Bonds (GEBs) should be linked to the stock market and your investment, to some extent should be protected.
Investment Trusts are more complicated there are a fixed number of shares in circulation and the price is determined by supply and demand.
Stocks and Shares ISAs are recommended for those looking for a long term investment. They have the advantage of the normal ISA in that you don´t pay tax on returns but there is a risk that their value can drop.
Managed Funds are investments that are managed by an expert fund manager. These work by pooling together money from other investors to create a single fund that provides an increase in buying strength and grants access to certain markets that might be closed to individuals with smaller amounts of money.
Remember that even if you are guaranteed to get all of your money back, after an extended investment period, your money may still be worth less that it was originally due to inflation.